To the Editor:

The Federal Reserve Board's recent study on the profitability of Community Reinvestment Act lending drives a hole the size of Texas through Sen. Phil Gramm's assertions of CRA chicanery.

While the Texas Republican gripes that community groups have "extorted" money from banks over the past few years, the banks are laughing all the way to, well … the bank.

As the Fed's study confirms, CRA-related lending is by and large profitable. More importantly, community development finance has pleased the double-bottom line - social impact and financial reward - earned banks goodwill in the community, and led to new and repeat business.

The real problem is not the law, or the intent behind the law, but neglect of the law. Congress has completely overhauled the laws governing the financial services industry, but has yet to keep CRA in step. Here are two simple ways to do so:

1. Expand CRA coverage to all financial service institutions and their affiliates that receive direct or indirect taxpayer support or subsidy.

The Gramm-Leach-Bliley Act helped to modernize the industry, paving the way for banks, finance companies, insurance and securities firms, and other "parallel banks" to affiliate with each other. However, as enacted in 1977, the CRA covers only banks.

The financial services industry will argue that only banks can be covered because only banks operate with the federal government's backing (deposit insurance and the Fed's lender of last resort promise).

However, in our 1996 paper "The Parallel Banking System and Community Reinvestment" the National Community Capital Association uncovered a web of taxpayer-backed subsidies essential to the entire financial services industry.

For example, federal guarantees and Treasury lines of credit have acted as a safety net against some nonbank insolvencies. In October 1998 the Fed punctuated this point convincingly when it structured a massive bailout of Long Term Capital Management by several taxpayer-subsidized banks.

2. Redefine what we mean by market.

Under the CRA, banks are required to provide access to credit in their market - that is, wherever they take deposits. In 1977 taking deposits was one of every bank's two main functions. (The other was lending.) In 2000 banks also market investments and sell insurance and securities, and they are rapidly expanding these more profitable lines of business.

In addition, the explosion of Internet and electronic banking has blurred the geographic lines by which assessment areas have been typically defined.

For example, you can buy homeowner's insurance from your mortgage lender, go to Home Depot for a home equity loan, call Telebank to deposit your earnings from a profitable E-Trade transaction, and pay your Visa bill by clicking the remote to Web TV while lying on the leather couch you bought with e-checks on eBay. All these companies are located in different parts of the country.

Clearly, defining CRA assessment areas based on local deposits is at odds with the way financial institutions and consumers operate today.

So let's make it simple - create a customer-based assessment area. Let banks define their markets, but let those markets define where the banks' community reinvestment responsibilities are. In other words, if a Philadelphia bank has credit card customers in Oregon, it also has CRA obligations there. The obligations ought to be commensurate with the level of business in any market.

The CRA has been the single most important tool for leveraging large amounts of bank capital into poor communities - approximately $1 trillion to date. Yet today it is on the brink of obsolescence - a negative externality of financial reform laws.

That's where community development financial institutions come in.

In order for CRA to work effectively in this new financial architecture, banks will rely increasingly on CDFIs to help target and deliver mainstream and "alternative" financial products and services to underserved markets.

Banks use their partnerships with CDFIs as part of an overall strategy to cultivate traditionally underserved markets, attract new borrowers, and generate revenues and profits. This kind of CRA-motivated lending has convinced many banks that there are large, untapped customer markets in low-wealth communities.

Bank and nonbank lenders are now racing to capture market share - just look to the subprime lending boom.

CDFIs and their bank partners know both the promise and challenge of lending and investing successfully in disinvested markets. They know the despair of economic isolation and the satisfaction of economic opportunity. Our ultimate responsibility is to use this experience and knowledge to address policies and practices that keep poor people poor and rich people rich.

Therefore, in this exciting age of financial reform and technological revolution, the need for substantive modernization of the Community Reinvestment Act becomes ever more clear.

The recent posturing around CRA - the Fed's study on CRA-lending and the proposed "CRA Sunshine" regulations - comes at an odd time. Republicans and the Clinton administration have worked together to deliver a package of initiatives designed to incentivize investment in economically disadvantaged New Markets and American Renewal Communities - not discourage or penalize it.

The glass is just now half-full.

Mark Pinsky
president and chief executive officer
Christina Weinmann
senior policy associate
National Community Capital Association

Editor's Note: The association is a financial intermediary representing 400 organizations that leverage public and private capital to revitalize poor urban, rural, and reservation-based communities.

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